Donald Coxe – Investment Recommendations (April 2009)

The April edition of Donald Coxe’s Basic Points research report (subtitled “Where will America go to grow”) has just been published. His investment recommendations, as summarized in this document, are listed in the paragraphs below, but I do recommend you also read the full report at the bottom of the post. (Also note that Donald’s weekly webcasts can be accessed from the sidebar of the Investment Postcards site.)

1. F. Scott Fitzgerald had it wrong, at least for American stocks: you do get a second, and even a third chance. Stocks leading that six-week rally looked down, couldn’t see the bottom anymore, and promptly retreated to lower levels. Think about what you’ll most want to own when The Real Thing arrives, and accumulate them at leisure, while the market tries to decide whether the economic recovery is a month, a quarter, or a year away.

2. Larry Summers adroitly brushed off a question about future levels of unemployment by saying, “Economic forecasters are divided between those who know they don’t know, and those who don’t know they don’t know”. Galbraith said the function of economic forecasting has been to make astrology look respectable. We know we don’t know, but we know we didn’t feel comfortable with the speed of optimism’s return. Those last two deep Mama Bear recessions didn’t end with such alacrity – nor did optimism return so speedily.

3. We do believe that the stock market is giving the correct signals that techs and commodities will lead the next recovery.

4. The other winner will be (sound of trumpets) commodity stocks. They were heavily outperforming the S&P until the late stages of the recent rally. We think they’ll move back to #1 slot – at least on relative strength.

5. Gold has been a bitter disappointment to its boosters in recent weeks. Bullion is down 4.6% this year, and most of the leading stocks are down far more than that. These setbacks came at a time when gold was getting more publicity as a haven investment than it has received in decades. Gold has been hurt by two rallies – first the dollar, then the bank stocks. More recently, investors have been spooked by the deal for the IMF to sell 403 tonnes of gold, at a time Indians, traditionally the most reliable buyers, are on strike. That 500 tonnes of scrap gold has come to the markets this year is a bad news/good news story: it’s a huge amount for markets to absorb, but it proves anew that gold is a precious asset in tough times. Gold stocks remain core investments within equity portfolios, reducing overall portfolio volatility. They will be superstars when the dollar finally falls, and people begin to get genuinely worried about inflation’s return. The stocks will outperform bullion on the upside.

6. Copper’s remarkable performance (up 48% in three months) worries us. Yes, China is coming back, but the industrial world is looking as bleak as a group of paid mourners at a funeral. We do not recommend adding to base metal exposure.

7. Within the energy group, we believe the bookends – refiners and oil sands – are most attractive. Why refiners? (1) Most oil analysts despise them; (2) They have to continue to refit their refineries to provide for greater percentage usage of that great nuisance, ethanol; (3) Americans are driving less; however (4) Refiners should hold up better than other oil sectors if there’s one last oil shakeout coming. Oil sands: You just possibly may never be able to buy oil for the 2020s as cheaply as you can today by buying the oilsands stocks. These are cornerstone investments for long-term oriented investors.

8. It’s planting season as we write, and the snow is largely gone. Low corn prices are discouraging farmers from planting as much corn as last year. Higher soybean prices (and cold wet weather) are encouraging them to plant more beans. Both these crucial crops are priced profitably for farmers, so don’t believe the talk that they’ll be cutting back dramatically on fertilizers. However, the extra emphasis on beans is bad news for the nitrogen fertilizer companies. (Beans don’t need nitrogen.) Overall, we still think the agricultural stocks have the best risk/reward profile.

9. The steep yield curve entices investors to buy long-term bonds and enriches all those bankers who have any wiggle room for making real loans after succumbing to the allure of all those fascinating, sophisticated ways to make ghastly bets. However, what the market giveth, the market taketh away once the economy begins to recover and inflation begins to return. Stay below your duration benchmark: give up yield now for performance later.